Noting that "poorly designed compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization," Bernanke, speaking to a gathering of community bankers in Phoenix, touched on a subject that's causing outrage on Capitol Hill and across the country.

He didn't mention AIG. But it's undoubtedly on his mind. He's scheduled to appear before Congress to talk about the giant insurer's hotly controversial decision to give $165 million in retention bonuses to employees in the division responsible for much of the company's losses.

Bernanke's tough talk on executive compensation will probably be the most talked about part of his speech. But he caused a brief rally in the stock markets and was cheered by the bankers in the audience when he said some regulations designed to make sure banks are healthy may "unduly magnify the ups and downs in the financial system and the economy."

In his first appearance since the Fed announced it would buy $300 billion in long-term U.S. debt and $1.25 trillion in other bonds in an effort to jump-start the economy, Bernanke also drew applause after calling for closer regulatory oversight of financial institutions deemed "too big to fail."

Closer scrutiny of bankers' pay wasn't the only controversial topic Bernanke broached. He seemed to wade into the contentious debate over whether regulators should suspend so-called "fair value" accounting standards that require banks to slash the value of rarely traded pools of mortgages and other investments on their balance sheets.

Some observers say those rules are making banks seem sicker than they are. Congress is considering legislation to alter them.

Proponents of the rules say suspending them would allow banks to hide toxic assets from investors without really improving their financial health.

"Policymakers should review existing capital rules and accounting standards" to figure out if they can be made less onerous for banks without further endangering the economy, Bernanke said.